Cap rate why high equals

[Brian Brown]

So you read about cap rates especially for multifamily and apt. buildings and high cap brings higher risks lower price and vise versa. Well if you've got building for building everything is equal but are getting twice the NOI on one over the other which in turn would produce a larger cap rate wouldn't you want the higher cap?

36000/300000=12 cap

48000/300000=16 cap

[Kushaal Malde]

Think about relative likelihoods. How likely is the 16 cap to perform without side effects -- what was the vacancy, is there any deferred maintenance or is it fully stabilized and sustainably year after year a 16 cap? In most cases you would find in any market, the higher cap rates come with the lower quality assets. Markets find equilibrium. If you have a 75% economic occupancy on a 16 cap property, it really is more similar to a 12% yield. Economic vacancy is physical vacancy and delinquencies. Are you in the business of collecting rent or passive income? A higher class property generally has much higher occupancy rates. 

Also, cap rates are more relevant for larger buildings, where that building's income and cash flow uniquely determines its own value. One to four unit properties don't reveal a whole lot by their cap rates. They are residential and priced on comparables.